Peter Cooke takes a step back from the immediate credit
crisis and takes an economist’s eye-view of the short-term problems
to try and find ways to get vehicle finance moving
again.

 

Never has the saying been more apposite than today: when you’re
up to your arse in alligators, it’s difficult to remember the task
is to drain the swamp.

Within motor finance all eyes are on the short term yet the
industry needs to take a view beyond the machinations of Lord
Mandelson and the vagaries of quantitative easing – the ultimate
financial laxative.

Short term, there is no denying, the task is to get vehicle
finance moving again – but what are the strategic risks? It is
perhaps worthwhile standing back from the immediate drama and
asking how the economists look at it.

Don’t expect a straight answer – two economists will have three
plausible solutions – but they will offer some worthwhile
caveats.

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Historically – well, in 2007 and for a few years before – the
economy and motor finance was in what might have been called a
‘steady state economy’; not too much inflation, just 2-3 percent.
All was quite well with the world, and the industry moved
swimmingly.

However, all that changed in 2008 when the credit crunch really
hit and the elephant was finally admitted as being in the room.
Credit crunch meant a tightening of vehicle finance for acquisition
of new and used units, and, in technical terms, in two consecutive
quarters, output and sales fell and we were into recession – well,
I think we are now.

The result is a slowdown of sales, OEMs and dealers slashing
prices and making amazing offers – but the market still refuses to
buck up sustainably.

The next phrase in the economists’ lexicon is ‘economic
depression’. That is serious. Sales and outputs fail to recover for
a number of quarters, the economy bumbles along, losing bits and
pieces, more companies go to the wall; in vehicle finance terms,
the market part shuts down.

Users look to extend replacement cycles, lessors are less
unhappy because depreciation is spread over a longer period and the
day of reckoning is delayed. However, the economy may be in a
downward spiral with ever fewer goods being produced. ‘Depression’
is exactly what it says.

The next stage down is ‘deflation’ – perhaps the most
frightening economic term of all. Suppliers continue to slash
prices to below the cost of production – or of provision, in the
case of finance – but nobody, and few companies, takes up the
offers.

Eventually goods – in our case cars and LCVs – start to wear out
and become unreliable, and have to be replaced. If the logjam gives
way quickly there can be all sorts of problems – manufacturing
plants may have shut down or been mothballed. Perhaps more
importantly, the supply chain has gone into hibernation – so how
does one kick-start the motor industry?

Playing with fire

The risk at that stage is inflation, or too much money chasing
too few goods and services. Certainly there could be ‘managed
inflation’ while prices return to their historic level, but there
are huge risks, as businesses try to claw back margins, that we
could go into full-scale inflation unless available credit is
tightly managed, which may mean higher taxes to choke off
demand.

Remember, we were promised a couple of years back that the age
of boom and bust is past.

My concern is how to avoid these stages of the traditional
economic cycle. What will boost sales of new cars and get the
finance industry moving again without having to go through this
self destructive cycle?

At the time of writing there are rumours of vouchers to scrap
old vehicles and acquire new ones. But has such a scheme been
thought right through? Remember, in the United Kingdom close to 80
percent of new cars sold are imported. Without wishing to get
nationalistic, any support to grow imports would play into the
hands of dissenting politicians and the next general election is
before June 2010.

Would it not be more effective to link those scrapping vouchers
to some form of credit availability? Take the voucher to your
nationalised] bank and obtain an acceptable commercial loan which
could be spent on a used car of up to, say, five years old.

Such an exercise would shake the used car supply chain and, if
we are lucky, cause movement of other used cars as well. Each
transaction would create a dealer margin opportunity.

The more I research the automotive industries, the more I am
convinced a healthy used car industry is the key. Given the parlous
situation of the industry today, I think OEMs’ captive finance
houses, point of sale finance providers and banks need to put at
least as much effort into kick starting the used car industry as
restarting the import of new cars.

Thomas Malthus was not far wrong when he called economics “the
dismal science”.

Professor Peter N C Cooke, KPMG Professor of Automotive
Management, University of Buckingham